NBK Weekly Money Markets Report dated 22-08-2010

United StatesVolatility ContinuesHeightened risk aversion remains the dominant theme in the global financial markets with the US Dollar continuing to benefit as the safe-haven currency. The Euro reached a 5-week low of 1.2660 on Friday from a high of 1.2923 at the beginning of the week, following comments form the European Central Bank to keep monetary policy loose for months to come and to extend unlimited liquidity to banks past the end of 2010. The Sterling range traded between a high of 1.5707 and a low of 1.5460 supported by better-than-expected numbers in the UK. The Japanese Yen continued to trade around a 15-year high against the greenback reaching 84.87 levels and increasing fears of an overall economic slowdown as well a prolonged deflation. The Swiss Franc also benefited from the risk aversion theme trading between 1.0255 and 1.0465 respectively. Finally, the Australian Dollar reached a low of 0.8840 on Friday after trading at a high of 0.9080 earlier in the week, pressured by increasing risk aversion.Jobless Claims on the RiseThe number of US workers filing new applications for unemployment insurance unexpectedly climbed to a nine-month high last week, another setback to the fragile economic recovery. Initial jobless claims increased 12,000 to a seasonally adjusted 500,000, the highest number since mid-November and against an expected drop to 476,000 from last week’s 488,000. Analysts argue that this number must fall below 450,000 to signal sustainable private payroll growth.Weak Housing MarketThe end of the popular homebuyer tax credit last April has left a void in the housing market, depressing sales and building activity. The US housing starts rose but to a much weaker rate than expected in July, while the housing permits for future home construction fell to their lowest level in more than a year, pointing to a weak housing market recovery. Housing starts rose to 546,000 in July against an expected rise to 560,000, down 7% from July last year. New building permits, which give a sense of future home construction, dropped 3.1% to a 565,000-unit pace last month, the lowest level since May 2009.Industrial Production & PPI The US industrial production expanded in July at twice the number economists had expected, a sign that at least one sector of the economy is still moving along, despite weakness in housing and jobs. Industrial output jumped 1% last month, mainly boosted by automotive production which surged nearly 9%.US producer prices rose in July for the first time in four month, pulled by higher prices for food and consumer goods. The Producer Price Index rose 0.2%, in line with market expectations.

Europe

Eurozone PPIThe Eurozone producer prices rose moderately in June, slightly below expectations in June, mainly driven by more expensive energy, but low growth of consumer good prices suggested underlying pressures remain muted. Prices in the 16-country euro area rose 0.3% month-on month and 3.0 % year, against an expected rise of 0.4% and 3.1% respectively. .German Investor Morale DropsThe German investor morale fell in August to its lowest level since April 2009 on concerns of weaker economic growth this year in Europe’s largest economy. The economic sentiment fell to 14.0 from 21.2 in July, declining for the fourth month in a row on concerns that a global slowdown will hit Germany’s export-oriented growth.

United KingdomMPC MinutesThe Bank of England minutes showed its Monetary Policy Committee voted 8-1 in favor of keeping interest rates on hold in August. This came against speculation that the minutes could reveal a three-way split. Additionally, the central bank voted to continue with a pause in its asset purchase program.Higher Retail SalesBritish retail sales rose 1.1% in July from the previous month, sharply higher than forecasts for a 0.4% gain. With strong sales in June and July, the third quarter is getting off to a very good start.JapanGDP Contracting The Japanese economy slowed sharply in the second quarter of 2010 from the previous two quarters as export growth moderated and a stimulus-driven recovery in consumption ran out of steam. The country’s annualized GDP expanded 0.4% annualized from 5.0% in the first quarter and well below the forecasted 2.3% rise. The weak data raised prospects for the Japanese government taking action to stem an extreme rise of the strengthening Yen due to the negative impact it might have on growth prospects.